“If you build it, they will come!”
So goes the popular movie saying, and if only it were that easy in the real estate development world! Sadly, many people think that it is this easy, but many of these have come to a sticky end with their development deals.
So if this approach doesn’t work, how should you approach real estate development deals to ensure you have the best chance of success?
One approach that I have used successfully is to take a “reverse engineering” approach.
The “Reverse Engineering” Approach
When I am looking at an area as a potential development area, one of the most effective methods of gaining some confidence that development deals are feasible in the area is to reverse engineer a recent existing deal.
Basically, my approach to this is to do the following:
- identify the end product that you are looking to create
- look through recent sales (or even current listings) and identify properties that have the same characteristics as your end product (ie style of dwelling, number of bedrooms, bathrooms, garages)
- Work backwards from the sale price, estimated build cost, estimated land cost, consulting costs etc to establish the amount of profit that was likely in the deal.
- Use these numbers as a basis to determine if the same approach is likely to work for you.
There are several benefits to the reverse engineering approach. Firstly, you are confirming that there is demand for the end product you are looking to create – you are much better to bring a product to market that has already proven successful than to be a pioneer (see What Can Wild West Movies Teach Us About Real Estate Development?), and bring a product to market that there has no proven demand.
Another benefit is that it can bring a level of accuracy to the numbers in your analysis. Often you will be able to find a floorplan that shows the size of the dwelling, possibly the sale price of the land. I will often talk to the builder to determine what it would cost to develop the same product, and they should be able to give you reasonably accurate figures, having just completed the deal.
Another area in which this approach can be useful is in identifying the team that you might need to actually get the development done. If you can identify the builder, you will have found someone with experience building what you want to build. He will also likely know the architect/designer of the dwelling and may be able to recommend other consultants required – all great information in putting accurate numbers into your analysis!The reverse engineering approach is a great way of confirming that you are heading in the right direction. I don’t go into any development without having reverse engineered a number of existing deals to confirm that my thinking is correct. Currently I am aiming to reverse engineer at least one deal per week in my chosen area(s).If you can’t find any deals to reverse engineer, is it time to move on and start looking in a new area?Over To You!
Put it into action – if you are considering a development deal, find an existing deal and reverse engineer it to see if what you are thinking is likely to stack up. This is something that you can do TODAY!